News

11

Sep 2015

To Hell in a Handcart

We have all been told how the UK economy is growing and doing better than other economies including Germany.

The collapse of Commodity Prices has had a direct effect on SMEs with a slowing down of national economies and these conditions are expected to worsen not improve.

Some Western economies are contracting which in English is recession. Look how panicked everyone is at China’s growth model. It is time to take strategic action to soften the effects of a sharp dip and recession proof your business.

Strategic Steps That Can Be Taken

Build a war chest.

Having cash reserves to face economic contraction. This brings the dual benefit of not relying too much on credit especially when it becomes tight, and having cash to take advantage of opportunities as they emerge.

If leveraged with debt (secured or otherwise) then plan to reduce down as much as practicable. If the level of debt is unsustainable and lenders are unsympathetic this ultimately can result in failure.

At the first signs of unmanageable debt seek advice about restructuring that debt. PCR can assist.

Reduce Discretionary Expenditure.

Look at every pound spent to determine whether it contributes to the business. It is my experience that too many SME owners continue to spend on budgetary items which they can simply do without.

Discretionary as the word implies is a choice. Advertising is always described as discretionary and almost inevitable seen as easy to cut. But cutting all advertising expenditure means no one knows you have a product or service to sell. Think carefully.

Carrying out this pruning exercise is however an opportunity to reduce unwanted overhead in the short and long term including the delay of capital expenditure and renegotiating rents on equipment and premises at time where prudence may be called for.

Stock Control.

Virtually all management tomes state not to hold too much stock as this ties up cash and also has an insurance cost which will be debilitating if we are heading for a downturn. If your sales are dipping you do not want to be holding slow moving stock. The only way to ‘get rid of’ may be through heavy discounting of price. This could be a recipe for losses, as it might set customers’ expectations in relation to future pricing, so consider carefully the cost of stock retention with this factor in mind.

Debtor Control.

Be smarter in debtor control and cash collection. Keep on top of any lengthening debtor days. It is not your business’s role to act as an involuntary bank for others. If you cannot do it yourself employ a good credit controller. This is often a service that can be outsourced, but choose your service provider carefully and obtain references!

Don’t have all your eggs in one basket.

Do Read Porter’s 5 forces. One of his strictures was ‘don’t have all your eggs in one basket’, i.e. if your main business is derived from one or two major clients then you are dependent on their success or otherwise. If a client fails or significantly reduces its trade your bottom line will suffer. Time spent on becoming less dependent on one or two clients / customers and in expanding the range of clients will soften the impact of any recession.

If you have managed to get this far you may well be calling me Jonah! But if you look at how Western economies have operated since the crash of 2008…Keynsian economics via quantitative easing… printing money essentially; over dependence on China and the dramatic fall in commodity prices then hell in a handcart comes to mind.

What to do. Well, for active advice on how to stress test and protect your business for the coming tsunami… do get in touch with your nearest PCR office!